New Year Countdown for New Leasing Standards

What’s on your New Year’s resolution list? Do you want to achieve a better work/life balance? Perhaps strike-off an exotic travel destination on your bucket list? Maybe you intend to finally launch that genius business idea you’ve pondered for months? Or, how about getting your lease arrangements into shape to comply with the new financial reporting requirements under AASB 16?

This may not be the kind of fitness goals you had in mind, but from 1 January 2019, the health of your business will depend on meeting significant changes to both International and Australian financial reporting standards.

From next year, all leases are expected to be reflected on a company’s balance sheet as a liability, even if there’s no intention to own the property at the end of the agreed rental period - the only exceptions to these new requirements: low-value leases and those on 12-month leases.

These new standards not only increase the compliance obligations for companies but also bring added complexity. This is because the new regulation doesn’t just apply to new leases signed from the new year, it also considers leases which are already in place. The changes also incorporate motor vehicle and equipment leasing.

A decade in the making, the new standards have been introduced to increase transparency by providing users of financial statements a complete snapshot of an entity’s leasing activities. Globally, it’s estimated more than US$2 trillion will be added to company balance sheets.

Not surprisingly, added paperwork will not be the only challenge that companies may encounter as a result of the changes. For some, the interest cover ratio, particularly early in a lease, when interest expense is at its’ highest, and debt to equity ratio at the start of a lease when the debt is at its peak will have a flow-on effect on the ability to borrow funds. Meanwhile, lessors may encounter an unwillingness to commit to long-term leasing arrangements with tenants or see tenants look for leasing agreements with variable terms (such as being based on store sales).

Retail companies which have a chain of stores with differing rent demands and contract durations, may find the new requirements especially demanding. Suddenly companies in this sector may have liabilities of $50 to $100 million on the balance sheet which previously did not have to be reported. This may also tip the company into the large reporting regime of ASIC as the companies intangible assets will also increase.

To make this transition less arduous for businesses, Moore Stephens has developed some templated models which apply the new AASB/IFRS 16 Lease standard. Significantly simplifying the steps involved to achieve the calculation, there are only five to 10 data inputs per lease required and accounts for multiple scenarios. For a straightforward leasing arrangement, the process should take less than 30 minutes to complete.

This video explains how the template models can help you meet the new standards.

Access to the templates is not restricted to ongoing Moore Stephens’ clients, as each template is available for stand-alone purchase by contacting David Holland, Andrew Johnson or Colin Prasad. The lease models are delivered as an Excel Zip file of Excel workbooks that cover the periods 2010 to 2040. If your requirements are outside these date ranges, or for technical support, please email vicleasesupport@moorestephens.com.au

Some companies may require greater guidance, particularly if a technical accountant is not directly employed within the business or the leasing portfolio is extensive, and that’s when it would be best to call on our expert advice. After all, as with most worthwhile resolutions, complying with the new standards will require a significant time commitment to ensure a positive transition into the new year.